Opinion: FDI in e-commerce the next big thing?

At a time when many studies have been projecting e-retailing as the next big thing in India, the DIPP has hit just the right note by releasing a discussion paper on 'FDI in E-Retail', writes Sidharrth Shankar, Partner with J. Sagar Associates, Advocates and Solicitors.

With the liberalisation of foreign investment regulations in retail, the Department of Industrial Policy and Promotion (DIPP) seems to have woken up to the exciting opportunity of Foreign Direct Investment (FDI) in e-commerce.

At a time when many studies have been projecting e-retailing as the next big thing in India, the DIPP has hit just the right note by releasing a discussion paper on 'FDI in E-Retail'.

Until recently, the commerce ministry - through the recent Consolidated FDI Policy Circular and various clarifications in Parliament - had been reiterating that FDI in e-commerce would not be permitted if it involves any form of retail trading (single brand or multi brand). In other words, business engaged in business-to-consumer sales (B2C) would not be entitled to attract FDI. Currently, unlike B2C, there are no such restrictions on business-to-business commerce (B2B), which is free to invite 100 per cent FDI.

It is no secret that the e-commerce industry requires accelerated investment, superb technological infrastructure and high profit margins, coupled with well coordinated orchestration of operations - all of which are missing at the moment. For this reason, as expected, about 70 per cent of e-commerce operations are staring at extinction. The sector is in dire need of receptive and favorable regulations, and any adverse moves at this moment may be detrimental to its existence.

Contrary to popular belief, empirical studies have proved that micro, small and medium enterprises (MSMEs) and traders have been profiting from e-commerce. Any further boost to this industry by way of FDI would essentially improve the financial situation of such enterprises.

Further, e-commerce has the potential to contribute to national development in various ways. Any foreign investment in the retail segment would be a boost for the manufacturing sector as well, thereby creating more job opportunities.

Increased capital inflow through the FDI route can be useful in setting up a systematized supply chain and distribution system, which would in turn accelerate infrastructural growth.

Also, with the marketplace models in place, FDI in e-commerce would tend to increase the base of retailers and customers on online platforms. This would increase accessibility, and even magnify employment opportunities for small-scale retailers in an economically efficient manner.

From the perspective of end-consumers; increased capital would definitely help companies to upgrade their services, and be more amenable to the requirements of customers. Also, technological improvements would introduce an element of transparency into the functioning of companies, customers, and most importantly, the regulatory watchdogs.

Even as the B2C businesses continue to reel under stringent government regulations and fail to attract equity, the government, as of now, has stuck to its position of not opening the FDI doors, reasoning that it may spell doom for domestic retailers. Also, the government insists that permitting FDI in B2C would throw up certain logistical issues, especially in certain inter-state transactions, where FDI approval would have to be taken across various states.

Against the government's stern stance, industry players have been emphatic about the need to allow FDI in this sector. Upping the ante for such reforms, industry estimates that B2C has the potential to contribute substantially to the GDP, if a supportive regulatory environment can be created. Even more, the need of the hour is a joint effort by all the players, including government and providers of infrastructural requirements, to realise the potential of this sector.

If FDI is authorised, it would undoubtedly maximize the prospects of the sector, making it an instrument for the growth of the economy. Effectiveness of operations coupled with equity flow into back-end investments would help the sector blossom.

Further, the fear of domestic players - that opening of FDI in e-commerce would be detrimental to unorganised retail - is completely unfounded. The e-commerce business and unorganised retail cater to entirely different sets of consumers with a nominal overlap in the product category.

Additionally, FDI inflow in this sector is estimated to create more than a half a million jobs in the coming seven to eight years.

In any case, the extension of FDI to B2C e-commerce seems inevitable. The impact of growing e-commerce on the economy has forced the government to study the FDI policy framework for its consequential implementation. The seriousness of such consideration was reflected by the importance given to such proposals in the recent talks between Prime Minister Manmohan Singh and US President Barack Obama. Nevertheless, such reform requires a holistic approach, including fortification of data protection and privacy laws to ensure faith in e-platforms.

At the risk of over-emphasising, it is high time we open the doors to foreign investors under a well laid out legal framework. FDI in e-commerce sector may well be the next big thing.

(The author is a Partner with J. Sagar Associates, Advocates and Solicitors. He can be reached at Sidharrth@jsalaw.com. The article was supported by Abhilaksh Gaind. Views are personal)